Owners' Equity Quiz

QUESTIONS

1. The three main financial statements are...

        A) The Income Statement, The Balance Sheet, and The Statement of Cash Flows

        B) The Income Statement, The Balance Sheet, and The Statement of Owners' Equity

 

2. The notes to the financial statements are used to...

        A) Provide a quantitative summary of all three financial statements

        B) Explain any unusual items in the financial statements

 

3. For an item to appear in the financial statements, it must...

        A) Have arisen from a specific, identifiable transaction

        B) Provide future economic benefits to the company

 

4. The fundamental accounting equation states that...

        A) Assets + Liabilities = Owners' Equity

        B) Assets = Liabilities + Owners' Equity

 

5. Owners' equity is sometimes referred to as net assets because it is equal to...

        A) Assets minus liabilities

        B) Assets plus liabilities

 

6. The activity on the income statement is transferred to owners' equity at the end of the year in the form of...

        A) Capital

        B) Retained Earnings

 

7. Because owners will sometimes withdraw profits from the company, retained earnings can really be viewed as the...

        A) Undistributed accumulated net profit earned by the company

        B) Distributed accumulated net profit earned by the company

 

8) If an accountant were to record the cash received from a customer but forget to reduce accounts receivable, the company would have...

        A) Overstated assets

        B) Understated liabilities

 

9) The accounts used on the income statement can be referred to as...

        A) Temporary accounts

        B) Permanent accounts

 

10) All of the revenues and expenses occurring throughout the year can really be viewed as taking place in owners' equity...

        A) True

        B) False

 

ANSWER KEY:

1A, 2B, 3A, 4B, 5A, 6B, 7A, 8A, 9A, 10A

 

PRACTICE PROBLEMS

1. A company begins the year with $100,000 in retained earnings, and makes $80,000 in net profit during the year. What is its retained earnings balance at the start of next year?

2. A company has calculated that the loyalty of its customers will bring in an additional $100,000 in profit over the next two years. What impact should that have on the financial statements in the current year?

3. A company has $100,000 in its rent expense account and $200,000 in accounts receivable on the last day of the year. What will be the balances in those accounts on the following day?

 4. A company has $100,000 in assets, and $50,000 in liabilities. How much will it have in owners' equity?

5. A company has net assets worth $500,000. How much will it have in owners' equity? 

 

ANSWER KEY:

1: $180,000

 

2: None, only past, identifiable transactions can be reflected in the financial statements

 

3: $0; $200,000

 

4: Assets = Liabilities + Owners' Equity

$100,000 = $50,000 + X

X = $50,000

 

5. Assets = Liabilities + Owners' Equity

Assets - Liabilities = Owners' Equity

Assets - Liabilities = Net Assets

Net Assets = Owners' Equity

$500,000